2010 Performance and Thoughts

2010 is done and gone. There are some very important lessons that I learned. Before I get to that, I want to take some time to talk about how I look at performance.

First I wanted to say that I don’t go too in-depth when measuring my performance. I only have 2 methods I use.

Method #1 (Purchase Tracking)

First is my batting average. Every time I buy or sell a company, I take a look at how I would’ve done relative to the appropriate index. I include dividends for realized positions. This gives me a sense of how well I can pick stocks. Also, I track the sources of the investment idea (blog, screen, friend, etc.), this helps me see if I can pick stocks with or without outside sources. It lets me know if I should even be reading certain blogs, books, or analyst research. Since 99% of bloggers are more versed than me, seeing if I am able to pick up on any risks that have been missed. Even though my sources can be different, I perform due diligence myself on every company, so the ultimate blame lies in my hands.

How have I done? Quite well. I have tracked my picks back to when I really started taking value investing seriously, 2008. Pick that I have come up with have averaged 26% with an average hold time of 9.5 months. The reason the hold time is so low is that I have many positions still open that I had just started, and the run-up in 2009 led some picks to reach fair value in a short amount of time. Some winners were JNJ, KOF, NAL (tsx) and CWB (tsx). And some major losers were BLZ, MS, IDG and GAS (all on tsx). During that time the corresponding indexes have returned and average 16%. With ideas that I generated by myself the return jumps to just over 40%. This is a function of me concentrating on businesses that are close to home and that I can understand.

Method #2 (Overall Performance Tracking)

For this method I monitor my performance relative to what I would earn if I had a completely hands off portfolio. The hands off aspect tries to demonstrate if I should even be managing my own money. Maybe I could focus on other things and only manage a portion (or none) of my money.

The “hands off” portion is 3 different ETFs, CBQ (25%), XIU (50%) and SPY (25%), with no cash to try to market time. CBQ and XIU trade on the tsx. I started out the year with the same amount of money in my brokerage account and every time I contributed money, I would buy a predetermined mix of the 3 different ETFs. This mock portfolio takes into account dividends, transaction costs, currency fluctuations and “lumpiness” of contribution. I also rebalance annually. My thinking is that if in 3 years I haven’t outperformed, then I should consider handing over the reigns to somebody more capable.

This years results are disappointing. The market returned around 8% and I returned around 4.5%. Being 3.5% behind is not great considering I did have a few good ideas for 2010, but I guess my bad ideas could have been worse.

The contributions to my portfolio are lumpy. Sometimes I contribute (though don’t purchase anything) at market highs and sometimes they are at market lows. This method shows whether or not I can even find good ideas fast enough to prevent cash from building up. This year I contributed over 20% of my gross income and if my portfolio was flat, I would have added an extra 30% to my portfolio. So you can see that finding good ideas is paramount.

This method shows my ability to “manage” the portfolio. Position sizing, cash size, currency fluctuations are key. The positives have been MCB, FES, and MGO (all on tsx). While the negatives have been NTRI, the banks, and MHH. Taking profits when the Mr. Market is giving you the chance is huge. Waiting for an extra 5-10% for a fair value you thought would take years to reach is RISKY.

There are also some companies that have been purchased recently that are showing some minor losses due to volatility and frictional costs.

In 2008 I was down around 25%. In 2009 I was up around 60%. And 2010 I was almost flat. Volatility seems to be the norm.

Why do I not care about mean, variability, alpha, Treynor, or any other measurement? I buy my groceries in dollars, I pay my mortgage in dollars, not anything else. When I turn grey, or hit my mid-life crisis, I will by my muscle car with dollars. If a person can time the market and pick low quality stocks, does it matter in 20 years how they generated outsized returns..NO! What if it was a person who only really understood one or two industries, and he/she still was able to do better than the market? To me all that matters is dollars and cents. I don’t manage others money, and I dont’ have to worry about withdraws at the wrong time. I can focus on the portfolio.

The lesson of 2010 is to focus on managing the portfolio, not just picking stocks. I guess the portfolio is kind of like a tamagotchi pet; if you leave it alone too long you will have a mess to clean up.

Dean

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